The atmosphere on Wall Street has never been more tense, and the air is filled with panic.
The Fed will announce its latest interest rate decision at 2:00 a.m. Beijing time on Thursday. Although the selling has stopped, it is only one important event before traders are reluctant to make big bets.
1. This meeting is still full of uncertainties.
-The implied probability of raising interest rates by 75 basis points has risen to 100%, compared with 0% last week (traders' expectations of the Fed's interest rate hike have been adjusted as quickly as possible);
-There are also rumors that it will raise interest rates by 100 basis points;
-It is not impossible to raise interest rates by 50 basis points.
Either option is now an astonishing move for the market, and traders are not overly convinced of which possibility.
Federal Reserve Chairman Powell's 2:30 press conference will be the most volatile moment in the market. Tactically speaking, how to explain "raising interest rates by 75 basis points at a time" will be full of challenges for Powell. Because the market has lost trust in the Fed, it is confused about the next step of the Fed. After raising interest rates by 75 basis points in June, how many basis points to raise interest rates in July has become a suspense. If the suspense cannot be solved, the turmoil cannot be quelled.
2. Raising interest rates so sharply cannot avoid recession.
Just last week, the market believed that the Federal Reserve could make the economy achieve a "soft landing", but now it has begun to price the "recession"-the yield of 2-10-year US bonds is temporarily upside down, which is the most favored signal of economic recession on Wall Street.
In this crisis, instead of becoming a safe haven asset, the soaring yield of US Treasury bonds has turned the global market into a turbulent sea.
3. Institutional investors are withdrawing US stocks as quickly as possible.
The US stock market officially entered a bear market on Monday, the 20th time in the past 140 years. This year, it fell to a bear market faster than average. It usually takes 244 days for the S&P 500 index to drop 20% from its peak, but this bear market only took 161 days.
In this case, hedge funds are pulling out of US stocks at the fastest rate in history, and the market sentiment is terrible (thinking that the economy is heading for recession and a hard landing).
Hedge funds tracked by Goldman Sachs on Monday sold U.S. stocks for the seventh day in a row, with the selling volume in the past two trading days reaching the highest level since tracking such data in April 2008.
A more drastic decline may not have arrived yet.
4. The market reprices the "end rate"
Money markets are expecting for the first time that the Fed will raise interest rates to 4 percent and plans to do so by the middle of next year. In the past, the market expected the "end rate" to be 3.25%-3.5%, reaching this level early next year. Now, in contrast to the past two expectations, the inflection point of financial markets will be delayed.
If the "end interest rate" changes, the interest rate cut schedule will be postponed accordingly. The market expects the first interest rate cut to take place at the end of next year and another 50 basis points by mid-2024.
Of course, if the economy falls into recession, there will probably be a 75 basis point interest rate cut. When the interest rate cut is expected to occur, it is the turning point in the true sense of the market.
But money-minded traders don't think about the fact that a rise to 4% could well plunge the economy into recession (the Fed doesn't necessarily have to target inflation at 2%), and it may be hard to see rates actually reaching that level. Therefore, the current pricing of "end rate" may be wrong.
Tomorrow's Fed meeting is a good thing if you look at things from a systemic perspective, no matter how the markets go up or down. Because the current panic stems from the unknown, after the announcement of the Fed's decision, a large part of the uncertainty in the market will be eliminated. This is how trading is done, which turns the unfavorable conditions in the eyes of ordinary people into favorable factors, thus achieving great achievements.
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